The prospect of residual rental income from rental property is enough incentive to prompt many people into purchasing or building rental property. Ordinarily, the logic is quite simple; get the property, pay the mortgage and pocket the residual cash. However, successful property management can be more costly and challenging.
The cost of managing people, paying for repairs and inescapable routine maintenance can tear into your cash flows reducing profitability. It is important for investors to have the full stack of costs before getting in. But how much should landlords spend in servicing their properties to retain them in good condition?
The inevitable balance is between doing the repairs and cutting back on profitability or failing to do the repairs and impairing future cash flows. The first step is to lay out all the expected costs under these categories.
Normally these majorly include interior and exterior repairs which may involve replacements, maintenance of the environment surrounding the property, repair of equipment and appliances, garbage collection, insurance, property management fees if there is one and any emergency costs. This does not include the rental tax which every landlord must anticipate.
Clearly, the layers between gross rent and net income can be thicker than the eyes can see. That is way it is prudent for first time landlords to thoroughly understand the expense component of rental income. To begin with, the standard costs for any rental property include mortgage payments, taxes and insurance. The investor should use these as the starting point and before going deeper in the forecasting of repair and maintenance costs.
Even though repair and maintenance expenses can vary, over time they tend to average around a certain value. And even though there are no rigid rules as to how much these costs should be, a common rule of thumb is to apportion least 1% of the property value to service these expenses annually. That means for a property valued at $100,000, an amount totalling at least $1,000 should do the job.
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Another common rule is that 50% of gross rent goes to repair and maintenance overheads. This means that before you get excited about the $1,000 a month rental income, remember that you can’t have your cake and eat it. However, these are not written on stone as different circumstances may permit different approaches.
There are also variants which suggest allocating $1 per square foot per year. Apparently, this is something that can be analyzed on a case by case basis.
However, it’s not all rough riding for investors who wish to purchase investment property because repair and maintenance costs are either tax deductible or can be capitalized. Furthermore, certain items of repair and maintenance are the obligation of the tenant. For instance cleanliness, garbage disposal fees in some instances, water and electricity bills et cetera. Furthermore, negligent damages are also chargeable to tenants.